Baku-Beijing Relations and China’s Growing Interest in the South Caucasus

This past January, Azerbaijani President Ilham Aliyev attended a session on “The Silk Road Effect” at the 2017 World Economic Forum in Davos, alongside Georgian Prime Minister Giorgi Kvirikashvili (President.az, January 19). Presumably, the intention of both leaders was to promote the importance of the new China-led “Silk Road Economic Belt” project and its role in the future development of the economy and infrastructure in the South Caucasus. As a source of and as a transit corridor for strategic global resources such as oil and natural gas, as well as the intersection of important transportation routes between the East and West as well as the North and South, the South Caucasus holds great geostrategic importance. While a relatively low priority for China during the early 2000s, more recently the South Caucasus has become an area of great interest as an extension of the highly ambitious Chinese Silk Road project, which aims to connect Europe and East Asia via new roads and railways across the Eurasian landmass.

But China’s real connection with the region will likely come when the Baku–Tbilisi–Kars (BTK) railway is finally completed. The railroad and its connection to Chinese Silk Road transit corridors further east will facilitate China’s ability to ship goods westward across the South Caucasus isthmus and, more generally, boost trade opportunities in the region. The agreement for the railway connection was signed in 2005, during President Aliyev’s first visit to Beijing.

For centuries, the South Caucasus region has tended to be an area of discord and intersecting interests for the big neighboring powers. But unlike the perpetually present regional actors such as Iran, Turkey and Russia, China has been a minor player in Azerbaijan until 2013, when the Silk Road project was officially launched. Baku reacted positively to the initiative, hoping that the ambitious project would bring more Chinese investment to the country. Baku realizes the importance of implementing economic diversification strategies before the depletion of its hydrocarbon reserves. Such a tendency has contributed greatly to shaping Azerbaijan’s bilateral relations with China, allowing the latter to rise to become one of Azerbaijan’s top ten trading partners (see below).

Trade turnover between China and Azerbaijan has grown 800-fold during their 22 years of diplomatic relations. Initially, bilateral trade amounted to only $1.5 million; but in 2004, it jumped to $200 million, and $368 million in 2006. By 2013, their trade turnover reached around $1.5 billion (Trade 2 CN, April 19, 2013). According to Yu Chunchi, the advisor to the Embassy of China in Azerbaijan, the volume of Chinese investment projects in Azerbaijan, which began to be implemented in 2002, has already reached $300 million as of 2016 (Trend, February 25, 2016). Unlike Azerbaijan’s larger foreign direct investment (FDI) actors Russia and Turkey, Chinese companies mainly focus on less-competitive fields such as the development of oil infrastructure, on-shore fields, the modernization of Soviet-era hydroelectric power plants (in Migechaur city), as well as cellular and telecommunication sectors. Moreover, in July 2016, state-owned China Southern Airlines launched regular Baku–Urumqi–Guangzhou passenger flights (Azer News, May 26, 2016).

Also in 2016, the China-based Asian Infrastructure Investment Bank (AIIB) approved its biggest loan so far for the construction of a gas pipeline connecting Azerbaijan to Turkey and Southern Europe. The AIIB lent $600 million to the Trans-Anatolian Natural Gas Pipeline Project (TANAP) which, when completed, will transport natural gas from fields in Azerbaijan across Turkey and then onward to markets in Southeastern Europe (GBTimes, December 22, 2016).

Azerbaijan is not the only regional country where China is willing to increase its influence. Georgia is also being targeted by ever larger infusions of Chinese investment. And the government in Tbilisi, for its part, is also pushing to establish a strategic partnership with Beijing. A key goal for Georgia was opening up Chinese market access to Georgian agricultural products, particularly wine exports (see EDM, November 28, 2016). Compared to Azerbaijan, China’s presence in Georgia is more diversified. And China is now one of the latter country’s four largest trading partners. According to Georgia’s state statistical service, the overall volume of Chinese FDI in the country reached $1.273 billion in 2014; Chinese officials hope to increase this investment to $1.7 billion by 2017 (see EDM, March 25, 2015; Epc.eu, May 2015; Sputnik-georgia.ru, January 5, 2017). A particularly important investment project currently under consideration is the possible purchase of 75 percent of the Poti Free Industrial Zone by CEFC China Energy Company Limited. According to the Georgian government, “Given its experience, performance, and expertise, CEFC China Energy Company Limited can make an enormous contribution not only to the development of the Poti Free Industrial Zone, but to the strengthening of Georgia as a transport and logistics hub” (Civil Georgia, January 16).

Although China does not share a direct border with the South Caucasus, it is eager to expand cooperation with regional countries. The establishment of land-based transportation and communication links between Asia and Europe across the South Caucasus, and boosting China’s trade with the region seem to be the main priorities for Beijing at this time.

That said, Beijing is clearly reluctant to become involved in the conflict resolution process in the South Caucasus. Perhaps out of consideration for Russia’s influence in the region, China pursues a “balanced policy” toward the so-called “frozen conflicts” in Abkhazia and South Ossetia and—most importantly for Baku—regarding Karabakh. In 1993, in the midst of the Nagorno-Karabakh War, China repeatedly voted in favor of United Nations Security Council (UNSC) resolutions demanding the withdrawal of Armenian troops from occupied Azerbaijani territories surrounding Karabakh (State.gov, Un.org, accessed April 12, 2017). And Beijing continues to back the peaceful resolution of the Karabakh conflict in accordance with those UNSC resolutions (Azernews.az, September 16, 2015). However, China pointedly abstained (along with 99 other UN members) from a General Assembly vote (in March 2008) on reaffirming Azerbaijan’s territorial integrity and calling on Armenia to pull all of its forces out of the occupied areas. It is worth pointing out that this particular General Assembly resolution was opposed by the three Minsk Group co-chairs—the United States, Russia and France—who head the official Karabakh conflict resolution process under the auspices of the Organization for Security and Cooperation in Europe (OSCE) (Un.org, March 14, 2008).

China’s further investment and economic activities in the South Caucasus will likely continue to focus on the energy sector and transit corridors. Over the medium and long term, this economic development promises to increase the global competitiveness of the region.